A (Mildly) Optimistic Take From an Unexpected Source

My friend and colleague John Cassidy has been one of the more bearish commentators on the U.S. economy for the past decade, which also means he’s been right more often than he’s been wrong in recent years. Given that these days even bulls are predicting a prolonged and deep recession, you might imagine that John’s take would be even more ursine than usual. But in the new issue of Portfolio, he actually switches gears, suggesting that, while the short-term outlook is going to remain dismal for months to come, he’s “less pessimistic than the conventional wisdom.” So much so, that recently he actually bought some stocks. (For John to do this is the rough equivalent of Larry Kudlow opposing a tax cut.)

Now, just because a pessimist has become an optimist (albeit hardly a giddy one: John suggests only that the U.S. economy will start to grow before the end of this year), that’s not a sign that he’s necessarily right. But even if you set aside the economic analysis in the piece, the important point it makes is that the danger of extrapolating from current trends exists just as much on the downside as it does on the upside, and that just as in at the height of a bubble people have a hard time imagining that it will end, at the depths of a downturn it’s easy to assume that it will last forever.

I think extrapolating from the present is especially difficult in the current case, because of the incredible speed with which the economic crisis in the real economy occurred. While the U.S. economy has been weak for more than a year, it was limping along tolerably well until September, when the failure of Lehman Brothers, the resultant freezing up of the credit markets, and the failure of Congress to pass the first version of the TARP sent it into shock. Now, it may be that this happened because everyone in the U.S. suddenly realized just how flimsy the state of the economy was. But it seems more likely that it occurred because the fear engendered by the bursting of the housing bubble and the turmoil in financial markets created a massive liquidity crisis—investors simply wanted (and want) to have their money in cash or government bonds, rather than to lend it. And if that’s the case, then it’s possible that having the government pour liquidity into the market (as it’s been doing), and taking steps to remove that fear and restoring investors’ confidence, could get the economy moving again much sooner than we expect.